Question

What impact, if any, do international accounting standards (i.e., the International Financial Reporting Standards developed by the International Accounting Standards Board) have on U.S.-owned businesses? On international businesses? Is the impact greater on U.S. businesses in any particular industry, and if so, why?

Answer 1

The International Financial Reporting Standards developed by the International Accounting Standards Board present guidelines for reporting the financial activities of a business. Similar to generally accepted accounting principles maintained by the Financial Accounting Standards Board in the United States, IFRS seeks to provide an internationally recognized set of standards to introduce greater consistency to financial reporting around the world. For U.S. businesses accustomed to GAAP standards, adapting to comply with IFRS can require a number of significant accounting changes. Understanding how switching to IFRS will affect your business becomes increasingly important as your business grows beyond U.S. borders.

Administrative and Accounting Changes

Complying with IFRS standards requires a number of significant changes in the way that accounting departments collect, classify and present financial data. The biggest change and challenge for U.S. businesses operating under IFRS is that they must follow two distinct and mutually exclusive sets of guidelines, since tjhey are still required to use GAAP guidelines if they report to the Securities and Exchange Commission. Reporting for accounts such as inventory must be separated between the two standards, for example, with different valuations resulting in different values for net income and expenses under either set of standards. This can require a business to either hire additional accounting staff or spend twice the amount of time preparing financial reports.

Financial Statements and Periodic Reporting

Preparing financial statements under IFRS is similar to GAAP guidelines, but with a few major differences. IFRS recognizes the same set of standard financial statements, including the income statement, balance sheet and statement of cash flows. However, businesses will need to change the specific ways they account for different line items on these statements. For example, businesses must specify the nature of expenses listed in income statements, in addition to the functional category, either by organizing expenses according to nature or disclosing their nature in the attached notes. Interim reports are considered to cover distinct periods under IFRS, rather than being seen as integral parts of an annual report. This requires accountants to change the way they classify a large number of current or long-term assets, expenses and liabilities.

Accounting for Assets and Inventory

IFRS presents a few major changes that can affect the way a U.S. business presents its assets and inventory. The last-in, first-out method of inventory costing is prohibited under IFRS, for example, which can radically change the way a U.S. business accounts for its inventory. Write-downs of inventory values cannot be reversed under IFRS, as another example, which can present significant challenges for U.S. businesses accustomed to adjusting its inventory values regularly. Accounting for asset depreciation can require changes, as well, since under IFRS a business must account for the depreciation of components separate from depreciation of equipment as a whole under certain circumstances.

Revenue Recognition Principles

Revenue recognition standards in general are simpler and more straightforward under IFRS, which can require major differences for financial reports based on GAAP. The the definition of revenue is the fundamental difference between the two. IFRS defines revenue as a gross inflow of economic benefit resulting in an increase in equity accounts, other than direct equity contributions made by owners. This leads to differences in how sales, service and deferred revenue are recognized and reported. The differences in revenue recognition can impact net income and a wide range of financial ratios, leading to large changes in a company's performance measures when switching to IFRS. This can require a company to alter its business model, pricing structures or payment terms to preserve existing ratio valuations.